Energy Prices Push CPI Up 0.5 Percent in December

The Consumer Price Index rose 0.5 percent in December — the largest single-month jump since July of 2009, when the index rose 0.7 percent.  This rise in headline inflation is entirely attributable to a 4.6 percent increase in energy prices over the month.  Though energy accounts for less than one-tenth of the index, the price of energy has risen at an annualized rate of 33.9 percent since September.  By comparison, the core rate of inflation rose 0.1 percent in December and at a 0.7 percent annualized rate over the last three months.

Outside of energy, the modest rate of inflation was broadly-based.  Housing prices rose 0.2 percent in December, driven largely by a 0.7 percent jump in household fuels and utilities, as well as a rebound in the price of lodging away from home.  Inflation in rent and owners’ equivalent rent continues to remain low — with 0.2 and 0.1 percent increases, respectively.  Even so, prices have been similarly restrained elsewhere.

Food prices have been moderate, rising 0.1 percent in December after rising 0.1 and 0.2 percent in October and November.  Over the last six months, the price of food and beverages have risen at a 1.6 percent annualized rate — roughly half the rate of inflation overall.

Apparel prices rose 0.1 percent in December and fell at a 0.3 percent annualized rate over the last three months.  Medical care prices rose 0.2 percent in the month and at a 1.9 percent rate since September.  In particular, hospital services bumped up 0.8 percent after falling 0.2 percent in November, while medical commodity and other services each rose only 0.1 percent in December.

Elsewhere in core prices, education prices rose 0.5 percent in December, balanced by a 0.6 percent fall in communication prices.  Recreation prices fell 0.2 percent in the month, while the price of other goods and services rose 0.2 percent — in part due to a 0.8 percent jump in the price of tobacco and smoking products.

Transportation prices rose 2.3 percent in the month, but again this was driven by an 8.5 percent jump in the price of gasoline, as the price of new and used vehicles remained flat.  Car and truck prices have fallen at a 3.2 percent annualized rate over the last three months, and 0.7 percent since June.

Also contributing to the rise in transportation prices was a 3.3 percent increase in airfare, which has also been recovering from mid-2009 lows.  Airline fares have risen more than 20 percent since July of 2009, yet remain 2.4 percent below their peak in August of 2008.

Nonfuel import prices rose 0.3 percent in December and at a 6.1 percent rate over the last three months.  Likewise, nonagricultural export prices rose 0.6 percent in December and are now running at an 8.2 percent annualized rate of inflation over the last three months.

As noted in earlier reports, both the import and export price indices are driven largely by increases in the prices of core industrial supplies, which are recovering from 2009 lows.

By contrast, the prices of imported and exported consumer goods have been much more restrained.  The prices of traded autos and parts were unchanged in December, as was the price of other imported consumer goods.  Exports of non-auto consumer goods rose only 0.2 percent in the month — the third consecutive month of disinflation after a rise of 1.0 percent in September.  The price of capital goods, both imported and exported, rose 0.1 percent in December.

Lastly, the real hourly wage fell $0.04 in December.  The real wage has now fallen nearly 0.5 percent over the last two years, and this likely understates the trend as high unemployment has shifted the composition away from lower-wage work.

Overall, inflation continues to remain low and existing price pressures appear to be dictated primarily by international markets, specifically industrial supplies and finished energy goods.  The December reports bring little evidence of domestic inflation pressures.

David Rosnick is an economist at the Center for Economic and Policy Research in Washington, DC.  This article was first published by CEPR on 14 January 2011 under a Creative Commons license.

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